Save as You Borrow
Save as You Borrow: why we encourage our members to Save as they borrow
“Save as you borrow” (SAYB) is the practice of credit unions to encourage their members to put an amount(c. 10% of the payment) into a savings account as part of making a loan repayment(see Figure 1). The SAYB model of lending used by credit unions is very helpful to their members as a way of developing savings habits. For members that have never been able to save, the well-being benefits are tangible. As they experience the anxiety reducing effects of having a savings buffer, most are motivated to continue the painless practice they have begun.
According to research published by the Fairbanking Foundation, four aspects of the approach has been reported to be helpful:
- it is easy, the savings provide security,
- it provides a lump sum at the end of the loan and
- there is a sense of achievement.
- 26% of participants in the surveys were saving regularly before they took out the loan or joined the credit union and the experience of SAYB leads to 71% having the realistic expectation that they will save throughout the year i.e. 45% of participants expect to become new regular savers.
There is a small cost to the members as they could pay off the loan quicker if the savings amount was applied to the loan and this would potentially reduce the interest cost. Although rational economic thinking, the costs/benefits of this approach are not so straightforward. The loan rate from credit unions is very competitive (12.7% for most members), particularly for the relatively small loans that they offer and the savings element is not sufficient to undermine this competitiveness.
It is reassuring that the vast majority of the participants appreciate how they are being helped and either think the “cost” is worth it or do not really regard it as a true “cost” given the competitive loan rate (79% of participants think itis worth paying the extra amount of interest).
The evidence for the SAYB approach in the context of credit unions is overwhelming. It is a rare financial services jewel and worth protecting and expanding for the right customers; it is important not to let it be undermined.
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